Wherever you stand on legalized marijuana, the idea has been gaining ground across the nation. America’s most populous state, California, approved recreational pot starting in 2018, with the promise that a Shangri La would emerge, generating a wealth of taxes, and all but eliminating the shady, criminal element. So far, that hasn’t happened. The country's largest marijuana market is struggling in almost every category. Today, we investigate why.
Jerred Kiloh: Hey.
Sharyl: How are you?
Kiloh: Excellent, good seeing you.
Sharyl: Today we’re getting a most excellent tour of “The Higher Path”.
Sharyl: So this is your shop?
Kiloh: This is my shop.
Sharyl: a marijuana dispensary in Sherman Oaks, California.
Kiloh: Your online orders are here, you would check in, you’d wait in here, and then we’d invite you inside, and being invited inside usually turns into a fairly large retail space.
We produce probably close to a 100,000 joints a month here. We sell about 20 [thousand] at our shop and then 80,000 pretty much go to other suppliers.
This is mostly manufacturing, packaging and distribution, a lot of this stuff we do our own packaging.
Sharyl: Dream Queen.
Kiloh: And we package everything here, Dream Queen is a sativa.
Everything in here is THC based.
Sharyl: Owner Jerred Kiloh also heads up the United Cannabis Business Association representing pot retailers in California.
Kiloh: So this is our entertainment space, really the goal of this is to turn this in to a consumption lounge.
Sharyl: Adjacent to his shop, we’re invited to observe a “taste test.”
California’s “Green Rush” was supposed to begin in January 2018 when it first became legal to buy and use recreational pot. The medical marijuana and illegal markets, which had operated with very little oversight, were supposed to come into the fold and generate major cash revenue.
Officials said legal pot would ultimately generate $1 billion a year in taxes for the financially troubled state, which is now has about a half trillion dollars in state and local debt — give or take. But the actual results are proving to be a major bummer.
Kiloh: Well, I'm less than one 10th of 1% profit margin currently. And I don't know any business that stays in business for those thin of margins.
Sharyl: Three years into California’s legal pot experiment, the results haven’t been quite as supporters expected and the state finds itself struggling with a lot of unexpected challenges that could serve as lessons for other states considering steps to make recreational marijuana legal.
Alex Traverso: I mean, it's been kind of a roller coaster you know.
Sharyl: Alex Traverso is with the state agency that enforces the rules, the Bureau of Cannabis Control.
Sharyl: What would you say are the successes of legalization so far?
Traverso: I think the successes are that now it's legalized, it's taxed, it’s regulated, people aren't going to jail for it.
Sharyl: But he says much to the surprise of some, most California cities and counties have chosen to ban pot stores in their towns.
Traverso: So out of the 483 cities in 58 counties, about 75% still don't allow retail storefronts.
Sharyl: And that’s not the biggest issue.
Sharyl: What are some of the challenges that you've come across?
Traverso: Yeah. I think the main challenges are still the illegal market. That's going to continue to be an issue for a number of years, similar to what we've seen in Colorado and other states that came before us.
Sharyl: 11 states, most recently Illinois, have legalized recreational marijuana. Many report a simultaneous boom in the black market. It’s estimated 75% of Californians are buying pot illegally and 90% of the weed sold in 2018 in Massachusetts was illegal, as were more than half of sales in Oregon and Washington state.
To understand why underground sales are thriving in states where pot is perfectly legal, just follow the money.
Kiloh: If you're a cultivator, you pay a tax. When you're a manufacturer, you pay a tax. And then once it gets to a distributor, you pay a tax. Then once it gets to the retailer, the retailer pays a tax. Then the state takes its excise tax, which is based on gross receipts. Then you have like individual gross receipts tax at the city level.
Sharyl: In California, those on the growing and production side get taxed:
$1.35 for each ounce of fresh cannabis plants,
$2.87 per ounce for leaves,
And $9.65 per ounce of dried cannabis flowers.
When it’s ready to be sold to customers, add on:
A 15% state excise tax,
A 7.25% state sales tax,
And local sales taxes that can exceed 10% more.
Kiloh: So after all is said and done, as a business owner, the final price of the product, about 58 to 60% of that price, is taxes.
Sharyl: And there’s a final unexpected wrinkle that’s emerged in California’s legal marijuana industry: complaints about lack of diversity among pot business owners.
State Senator Steven Bradford: As we all know, prior to the legalization, you've talked about the folks who were arrested the most. It was black and brown individuals.
Sharyl: California State Senator Steven Bradford is among those who believe minorities should benefit more from legal pot.
Bradford: 70% of all arrests for possession or sale of marijuana was black and brown people. Now in the reverse, less than 10% of people of color have a license for legalized marijuana. So that should be of great concern to all of us here.
Sharyl: Bradford led a successful push to get over $40 million in state tax money dedicated to cannabis equity programs.
One of the beneficiaries? The black family that owns this pot “incubator,” as it’s called. Housed in a giant warehouse space in Los Angeles County, it’s producing under brand names like “Emerald Dreams.”
With marijuana lovers out of the closet and puffing in the open, legal weed has yet to deliver on its promises.
Sharyl: What would you say is the lesson so far from legal marijuana in California?
Kiloh: We had billions of dollars of growers, suppliers, distributors, who are already working a system. And instead of saying, "Hey, let's lower the barriers to entry, keep taxes low. Let's bring all this existing infrastructure. Let's get as much tax revenue as we can from it”. I think we pushed them out of the legal market because the barriers to enter were so high. And I think we made a big mistake in doing that.
Sharyl: But supporters vow to press for changes to keep the whole movement from going down as half baked.
Sharyl (on camera): California revised its forecasted revenue from the pot excise tax downward by $222 million over two years — to match the reality on the ground.